| ARRAY BIOPHARMA INC Item 1A Risk Factors In addition to the other factors discussed elsewhere in this report and in other reports we file with the SEC, the following factors could cause actual results or events to differ materially from those contained in any forward-looking statements made by us or on our behalf |
| In addition, other risks and uncertainties not presently known to us or that we currently deem immaterial may impair our business operations |
| If any of the following risks or such other risks occur, it could adversely affect our business, operating results and financial condition, as well as cause the value of our common stock to decline |
| RISKS RELATED TO OUR BUSINESS We have a history of losses and may not achieve or sustain profitability |
| We are at an early stage of executing our business plan, and we have a limited history of developing and out-licensing our proprietary drug candidates and offering our drug discovery capabilities |
| We have incurred significant operating and net losses and negative cash flows from operations since our inception |
| As of June 30, 2006, we had an accumulated deficit of dlra133dtta7 million |
| We had net losses of dlra39dtta6 million, dlra23dtta2 million and dlra26dtta0 million for the fiscal years ended June 30, 2006, 2005 and 2004, respectively |
| We expect to incur additional losses and negative cash flows in the future, and these losses may continue or increase due in part to anticipated increases in expenses for research and development, particularly clinical development, expansion of our clinical and scientific capabilities, acquisitions of complementary technologies or in-licensed drug candidates and possible reductions in revenue from drug discovery collaborations |
| We may not be able to achieve or maintain profitability |
| Moreover, if we do achieve profitability, the level of any profitability cannot be predicted and may vary significantly |
| Much of our current revenue is non-recurring in nature and unpredictable as to timing and amount |
| While several of our out-license and collaboration agreements provide for royalties on product sales, given that none of our drug candidates have been approved for commercial sale, that our drug candidates are at early stages of development and that drug development entails a high risk of failure, we do not expect to receive any royalty revenue for several years, if at all |
| For the same reasons, we may never realize much of the milestone revenue provided for in our out-license and collaboration agreements |
| We also expect to incur significant additional costs to build our clinical development capabilities and to develop drugs we select to commercialize ourselves or partner for later-stage co-development and commercialization, and we may not realize revenue from such efforts for several years, or at all |
| In addition, we have been devoting more resources to drug discovery and our proprietary drug programs |
| As a result, we expect that revenue from the sale of our research tools and services will continue to decline as a percentage of total revenue and that our research and development and other expenses will continue to increase |
| 13 ______________________________________________________________________ Our drug candidates are at early stages of development, and we may not successfully develop a drug candidate that becomes a commercially viable drug |
| The drug discovery and development process is highly uncertain, and we have not developed, and may never develop, a drug candidate that ultimately leads to a commercially viable drug |
| All of our drug candidates are in the early stages of development, and we do not have any drugs approved for commercial sale |
| Before a drug product is approved by the FDA for commercial marketing, it is tested for safety and effectiveness in clinical trials that can take up to six years or longer |
| At any time, a clinical trial can be placed on “clinical hold”, or temporarily or permanently stopped for a variety of reasons, principally for safety concerns |
| Only one of our candidates, ARRY-886, is in a Phase 2 clinical trial, a trial that our partner AstraZeneca announced in June 2006 |
| ARRY-186 and two other candidates, ARRY-543 and ARRY-162, are currently in Phase 1 trials, and another, ARRY-797, is expected to enter a Phase 1 trial in the fall of 2006 |
| Candidates that appear promising in pre-clinical or clinical trials may fail to become marketed drugs for a number of reasons, including: · the failure to achieve clinical trial results that indicate a candidate is effective in treating a specified condition or illness in humans; · the presence of harmful side effects; · the failure to obtain FDA or other regulatory approval; · the lack of commercial viability of the drug; · the failure to acquire, on reasonable terms, intellectual property rights necessary for commercialization; and · the existence of therapeutics that are more effective or economical to produce |
| At any time, we or our collaborators may decide to discontinue the development of a drug candidate or not to commercialize a candidate |
| If we terminate a preclinical program in which we have invested significant resources, we will have expended resources on a program that will not provide a full return on our investment and missed the opportunity to have allocated those resources to potentially more productive uses |
| Even if one of our drug candidates receives regulatory approval for marketing, physicians or consumers may not find that its effectiveness, ease of use, side effect profile, cost or other factors make it effective in treating disease or more beneficial than or preferable to other drugs on the market |
| Additionally, governments and health insurance plans or maintenance organizations may choose not to include the drug on their formulary list for reimbursement |
| As a result, the drug may not be used or may be used only for restricted applications |
| Our business depends heavily on the extent to which the pharmaceutical and biotechnology industries in-license drug candidates to fill their product pipelines and collaborate with other companies for one or more aspects of their drug discovery process |
| We are highly dependent on pharmaceutical and biotechnology companies continuing to in-license drug candidates to fill their clinical development pipelines and to collaborate with outside companies to obtain drug discovery expertise, and on their willingness to spend significant funds on research and development |
| Our capabilities include aspects of the drug discovery process that pharmaceutical and biotechnology companies have traditionally performed internally |
| The willingness of these companies to in-license drug candidates and to expand or continue drug discovery collaborations to enhance their research and development process is based on several factors that are beyond our control |
| These include their ability to hire and retain qualified scientists, the resources available for entering into drug discovery collaborations and the spending priorities among various types of research activities |
| In addition, our ability to convince these companies to in-license our drug candidates or programs or to use our drug discovery capabilities, rather than develop them internally, will depend on many factors, including our ability to: · discover competitive drug candidates targeting large market opportunities; 14 ______________________________________________________________________ · develop and implement drug discovery technologies that will result in the identification of higher-quality drug candidates; · attract and retain experienced, high caliber scientists; · achieve timely, high quality results at an acceptable cost; and · design, create and manufacture our chemical compounds in quantities, at purity levels and at costs that are acceptable to our collaborators |
| The importance of these factors varies depending on the company and type of discovery program, and although we believe we currently address many of these factors, we may be unable to meet any or all of them in the future |
| Even if we are able to address these factors, these companies may still decide to perform these activities internally, acquire companies to fill their product pipelines or retain other companies that provide drug research and development expertise similar to ours |
| We may not be successful in entering into additional out-license agreements on favorable terms |
| We are committing significant resources to create our own proprietary drug candidates and to build a commercial-stage biopharmaceutical company |
| In fiscal 2006, we increased our investment in proprietary research to dlra33dtta4 million, compared to dlra22dtta9 million, dlra15dtta9 million for fiscal years 2005 and 2004, respectively |
| Our proprietary drug discovery programs are in their early stage of development and are unproven |
| To date, we have entered into three out-licensing agreements for the co-development and commercialization of our drug candidates |
| Although we have expended, and continue to expend, resources on internal research and development for our proprietary programs, we may not be successful in creating valuable proprietary drug candidates that would enable us to enter additional out-licensing agreements with favorable terms that include up-front, milestone, royalty and/or license payments |
| In addition, we may undertake and fund, solely at our expense, further development, clinical trials, manufacturing and marketing activities for a greater number of proprietary candidates than we planned |
| As a result, our requirements for capital, which may not be available on favorable terms, could increase significantly, or we may be required to substantially reduce our development efforts, which would delay, limit or prevent our ability to commercialize our drug candidates |
| We may not out-license our proprietary programs at the most appropriate time to maximize the total value or return of these programs to us |
| A critical aspect of our business strategy is to out-license drug candidates for late-stage co-development and commercialization to obtain the highest possible value while also evaluating earlier out-licensing opportunities to maximize our risk-adjusted return on our investment in proprietary research |
| Because the costs and risk of failure of bringing a drug to market are high, the value of out-licensing a drug candidate generally increases as it successfully progresses through clinical trials |
| Array may choose or be forced to out-license a drug candidate or program on terms that require us to relinquish commercial or market rights or at a point in the research and development process that does not provide as great a value or return than what might have been obtained if we had further developed the candidate or program internally |
| Likewise, we may decline, or be unable to obtain favorable, early out-licensing opportunities in programs that do not result in a commercially viable drug, which could leave the resulting program with little or no value even though significant resources were invested in its development |
| We expect that revenue from our funded research collaborations will decline in the future as we focus more resources on our proprietary research programs |
| We expect that revenue from our funded research collaborations to discover drug candidates against targets our collaborators select will decline |
| Historically, revenue from these collaborations has partially funded development of a fully capable drug discovery platform for identifying and developing early stage drug candidates |
| We believe the value of the drug candidates Array has created for many of our collaborators under these collaboration agreements has exceeded the economic reward provided to us under the agreements |
| One of our primary business strategies is to transition to a partnering strategy where, in addition to potentially obtaining higher milestone and royalty rates, we would out-license later stage candidates and retain commercialization or co-promotional rights in parts of the world |
| In order to transition to this approach, we expect to make significant investments in our own 15 ______________________________________________________________________ drug discovery efforts to discover additional candidates for out-licensing and that our revenue will decline as our historical collaborations end |
| Our collaborators have substantial control and discretion over the timing and the continued development and marketing of drug candidates we create for them |
| Our collaborators have significant discretion in determining the efforts and amount of resources that they dedicate to our collaborations |
| Our collaborators may determine not to proceed with clinical development or commercialization of a particular drug candidate for a number of reasons that are beyond our control, even under circumstances where we might have continued such a program |
| In addition, our ability to generate milestone payments and royalties from our collaborators depends on our collaborators’ abilities to establish the safety and efficacy of our drug candidates, obtain regulatory approvals and achieve market acceptance of products developed from our drug candidates |
| We also depend on our collaborators to manufacture clinical scale quantities of some of our drug candidates and would depend on them in the future for commercial scale manufacture, distribution and direct sales |
| Our collaborators may not be successful in manufacturing our drug candidates on a commercial scale or in successfully commercializing them |
| We face additional risks in connection with our collaborations, including the following: · our collaborators may develop and commercialize, either alone or with others, products and services that are similar to or competitive with the products that are the subject of the collaboration with us; · our collaborators may underfund or not commit sufficient resources to the testing, marketing, distribution or other development of our drug candidates; · our collaborators may not properly maintain or defend our intellectual property rights or they may utilize our proprietary information in such a way as to invite litigation that could jeopardize or potentially invalidate our intellectual property or proprietary information or expose us to potential liability; · our collaborators may encounter conflicts of interest, changes in business strategy or other business issues which could adversely affect their willingness or ability to fulfill their obligations to us (for example, pharmaceutical and biotechnology companies historically have re-evaluated their priorities following mergers and consolidations, which have been common in recent years in these industries); and · disputes may arise between us and our collaborators delaying or terminating the research, development or commercialization of our drug candidates, resulting in significant litigation or arbitration that could be time-consuming and expensive, or causing collaborators to act in their own self-interest and not in the interest of our stockholders |
| The sale and manufacture of drug candidates that we develop with our collaborators or on our own may not receive regulatory approval |
| The development and commercialization of drug candidates for our collaborators and our own internal drug discovery efforts are subject to regulation |
| Pharmaceutical products require lengthy and costly testing in animals and humans and regulatory approval by governmental agencies prior to commercialization |
| It takes several years to complete testing, and failure can occur at any stage of testing |
| Results attained in preclinical testing and early clinical trials for any of our drug candidates may not be indicative of results that are obtained in later studies, and significant setbacks in advanced clinical trials may arise, even after promising results in earlier studies |
| Clinical trials may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals or result in marketable products |
| Based on results at any stage of testing, we or our collaborators may decide to repeat or redesign a trial or discontinue development of a drug candidate |
| Approval of a drug candidate as safe and effective for use in humans is never certain, and regulatory agencies may delay or deny approval of drug candidates for commercialization |
| These agencies may also delay or deny approval based on additional government regulation or administrative action, on changes in regulatory policy during the period of clinical trials in humans and regulatory review or on the availability of alternative treatments |
| Similar delays and denials may be encountered in foreign countries |
| None of our collaborators have obtained regulatory 16 ______________________________________________________________________ approval to manufacture and sell drug candidates owned by us or identified or developed under an agreement with us |
| If we or our collaborators cannot obtain this approval, we will not realize milestone or royalty payments based on commercialization goals for these drug candidates |
| Even if our drug candidates obtain regulatory approval, we and our collaborators will be subject to ongoing government regulation |
| Even if regulatory authorities approve any of our drug candidates, the manufacture, marketing and sale of these drugs will be subject to strict and ongoing regulation |
| Compliance with this regulation consumes substantial financial and management resources and may expose us and our collaborators to the potential for other adverse circumstances |
| For example, approval for a drug may be conditioned on costly post-marketing follow-up studies |
| Based on these studies, if a regulatory authority does not believe that the drug demonstrates a clinical benefit to patients, it could limit the indications for which a drug may be sold or revoke the drug’s marketing approval |
| In addition, identification of certain side effects after a drug is on the market may result in the subsequent withdrawal of approval, reformulation of a drug, additional preclinical and clinical trials and changes in labeling |
| Any of these events could delay or prevent us from generating revenue from the commercialization of these drugs and cause us to incur significant additional costs |
| In addition, the marketing of these drugs by us or our collaborators will be regulated by federal and state laws pertaining to health care “fraud and abuse,” such as the federal anti-kickback law prohibiting bribes, kickbacks or other remuneration for the order or recommendation of items or services reimbursed by federal health care programs |
| Many states have similar laws applicable to items or services reimbursed by commercial insurers |
| Violations of fraud and abuse laws can result in fines and/or imprisonment |
| If our drug candidates do not gain market acceptance, we may be unable to generate significant revenue |
| Even if our drug candidates are approved for sale, they may not be successful in the marketplace |
| Market acceptance of any of our drug candidates will depend on a number of factors including: · demonstration of clinical effectiveness and safety; · the potential advantages of our drug candidates over alternative treatments; · the ability to offer our drug candidates for sale at competitive prices; · the availability of adequate third-party reimbursement; and · the effectiveness of marketing and distribution methods for the products |
| If our drug candidates do not gain market acceptance among physicians, patients and others in the medical community, our ability to generate meaningful revenues from our drug candidates would be limited |
| If we need but are unable to obtain additional funding to support our operations, we could be unable to successfully execute our operating plan or be forced to reduce our operations |
| We have historically funded our operations through revenue from our collaborations and the issuance of equity securities |
| We used dlra24dtta3 million in our operating activities in fiscal 2006 while we used dlra17dtta2 million in our operating activities in fiscal 2005 |
| Although we anticipate that we will use more cash in our operating activities in future periods, we believe that our existing cash, cash equivalents and marketable securities and anticipated cash flow from existing out-license and collaboration agreements will be sufficient to support our current operating plan for at least the next 12 months |
| However, our current operating plan and assumptions could change as a result of many factors, and we could require additional funding sooner than anticipated |
| To the extent that the cash from our future operating activities is insufficient to meet our future capital requirements, we will have to raise additional funds to continue our proprietary research and development |
| We may not be able to raise funds on favorable terms, if at all |
| To the extent that we raise additional capital through the sale 17 ______________________________________________________________________ of equity or convertible debt securities, the issuance of those securities would result in dilution to our stockholders |
| We have a credit facility providing for a dlra10 million term loan, and a dlra5 million equipment line of which a total of dlra14dtta1 million was advanced to us as of June 30, 2006 |
| In addition we have a dlra6dtta8 million revolving line of credit to support standby letters of credit |
| A portion of our cash flow will be dedicated to the payment of principal and interest on such indebtedness, which could render us more vulnerable to competitive pressures and economic downturns and imposes some restrictions on our operations |
| If we are unable to obtain additional funds when needed, we may be required to curtail operations significantly or to obtain funds through other arrangements on unattractive terms, which could prevent us from successfully executing our operating plan |
| We have limited clinical development and commercialization experience |
| One of our business strategies is to develop select drug candidates through later stage clinical trials before out-licensing them to a pharmaceutical or biotechnology partner for further clinical development and commercialization and to commercialize select drug candidates ourselves |
| To date, we have filed three IND applications and initiated three Phase 1 clinical trials, and we have not yet conducted a Phase 2 or later stage clinical trial ourselves, nor have we commercialized a drug |
| We have limited experience conducting clinical trials and obtaining regulatory approvals, and we may not be successful in some or all of these activities |
| We have no experience as a company in the sales, marketing and distribution of pharmaceutical products and do not currently have a sales and marketing organization |
| We expect to expend significant amounts to recruit and retain high quality personnel with clinical development experience |
| Developing commercialization capabilities would be expensive and time-consuming, could delay any product launch, and we may never be able to develop this capacity |
| To the extent we are unable or determine not to acquire these resources internally, we may be forced to rely on third-party clinical investigators, clinical research or marketing organizations, which could subject us to costs and to delays that are outside our control |
| If we are unable to establish adequate capabilities independently or with others, we may be unable to generate product revenues for certain candidates |
| Our research and development capabilities may not produce viable drug candidates |
| We have entered into several research and development collaborations under which we provide drug discovery services to identify drug candidates for our collaborators using the Array Discovery Platform |
| We also seek to identify and develop drug candidates for our proprietary programs |
| It is uncertain whether we will be able to provide drug discovery more efficiently or create high quality drug candidates that are suitable for our or our collaborators’ purposes, which may result in delayed or lost revenue, loss of collaborators or failure to expand our existing relationships |
| Our ability to create viable drug candidates for ourselves and our collaborators depends on many factors, including the implementation of appropriate technologies, the development of effective new research tools, the complexity of the chemistry and biology, the lack of predictability in the scientific process and the performance and decision-making capabilities of our scientists |
| Our information-driven technology platform, which we believe allows our scientists to make better decisions, may not enable our scientists to make correct decisions or develop viable drug candidates |
| If our drug discovery and development programs do not progress as anticipated, our revenue and stock price could be negatively impacted |
| We estimate the timing of a variety of preclinical, clinical, regulatory and other milestones for planning purposes, including when a drug candidate is expected to enter clinical trials, when a clinical trial will be completed or when an application for regulatory approval will be filed |
| We base our estimates on facts that are currently known to us and on a variety of assumptions, many of which are beyond our control |
| Delays may be caused by regulatory or patent issues, interim or final results of on-going clinical trials, scheduling conflicts with participating clinics and the availability of patients who meet the criteria for, and the rate of patient enrollment in, clinical trials |
| If we or our collaborators do not achieve milestones when anticipated, we may not achieve our planned revenue, and our stock price could decline |
| We may not realize anticipated benefits from future acquisitions |
| As part of our business strategy, we may acquire, invest in or form strategic partnerships with businesses with complementary products, services and/or technologies |
| Acquisitions and strategic partnerships involve numerous risks, including, but not limited to: 18 ______________________________________________________________________ · difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired companies; · diversion of management’s attention from other operational matters; · the potential loss of key employees; · the potential loss of key collaborators; · lack of synergy, or the inability to realize expected synergies, resulting from the acquisition or partnership; and · impairment of acquired intangible assets as a result of technological advancements or worse-than-expected performance of the acquired company or the partnered assets |
| Mergers and acquisitions are inherently risky and involve significant investments in time and resources to effectively manage these risks and integrate an acquired business |
| Even with investments in time and resources, an acquisition or strategic partnership may not produce the revenues, earnings or business synergies we anticipate |
| An acquisition that fails to meet our expectations could materially and adversely affect our business, financial condition and results of operations |
| Because we rely on a small number of collaborators for a significant portion of our revenue, if one or more of our major collaborators terminates or reduces the scope of their agreement with us, our revenue may significantly decrease |
| A relatively small number of collaborators account for a significant portion of our revenue |
| Genentech, InterMune and AstraZeneca accounted for 35prca, 24prca and 16prca, respectively of our total revenue in fiscal 2006 |
| In fiscal 2005 the same collaborators accounted for 28prca, 10prca and 27prca respectively of our total revenue |
| We expect that revenue from a limited number of collaborators, including Genentech, InterMune and Ono will account for a large portion of our revenue in future quarters |
| In general, our collaborators may terminate their contracts with us upon 90 to 120 days’ notice for a number of reasons |
| In addition, some of our major collaborators can determine the amount of products delivered and research or development performed under these agreements |
| As a result, if any one of our major collaborators cancels, declines to renew or reduces the scope of its contract with us, our revenue may significantly decrease |
| We may not be able to recruit and retain the experienced scientists and management we need to compete in the drug research and development industry |
| We have 276 employees as of June 30, 2006, and our future success depends upon our ability to attract, retain and motivate highly skilled scientists and management |
| Our ability to achieve our business strategies, including progressing drug candidates through later stage development or commercialization, attracting new collaborators and retaining, renewing and expanding existing collaborations, depends on our ability to hire and retain high caliber scientists and other qualified experts |
| We compete with pharmaceutical and biotechnology companies, contract research companies and academic and research institutions to recruit personnel |
| We may incur greater costs than anticipated, or may not be successful, in attracting new scientists or management or in retaining or motivating our existing personnel |
| Our future success also depends on the personal efforts and abilities of the principal members of our senior management and scientific staff to provide strategic direction, manage our operations and maintain a cohesive and stable environment |
| In particular, we rely on the services of Robert E Conway, our Chief Executive Officer; Dr |
| Kevin Koch, our President and Chief Scientific Officer; Dr |
| David L Snitman, our Chief Operating Officer and Vice President, Business Development; R Michael Carruthers, our Chief Financial Officer; and John R Moore, our Vice President and General Counsel |
| We have employment agreements with all of the above personnel that are terminable upon 30 days’ prior notice |
| In addition, we believe that successfully building our clinical development capabilities depends to a great extent on our ability to recruit and retain a high caliber Chief Medical Officer |
| If we cannot attract and retain a Chief Medical Officer or other qualified scientists and management, we may not be able to successfully execute our operating plan |
| Our cGMP and pharmacology facilities and practices may fail to comply with government regulations |
| All facilities and manufacturing processes used in the production of Active Pharmaceutical Ingredients for clinical use in the United States must be operated in conformity with current Good Manufacturing Practices 19 ______________________________________________________________________ (cGMP), as established by the FDA We operate a clinical-scale manufacturing facility that we believe conforms with cGMP requirements |
| This facility and our cGMP practices are subject to periodic regulatory inspections to ensure compliance with cGMP requirements |
| In addition, we could be required to comply with specific requirements of our collaborators, which may exceed FDA requirements |
| Failure on our part to comply with applicable regulations and specific requirements of our collaborators could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities |
| Material violations of cGMP requirements could result in regulatory sanctions and, in severe cases, could result in a mandated closing of our cGMP facility |
| In addition, our pharmacology facility may be subject to the United States Department of Agriculture (USDA) regulations for certain animal species |
| Failure on our part to comply with applicable regulations and specific requirements of our collaborators could result in the termination of ongoing pharmacology research |
| Material violations of USDA requirements could result in additional regulatory sanctions and, in severe cases, could result in a mandated closing of our pharmacology facility for certain species |
| Our development, testing and manufacture of drug candidates may expose us to product liability lawsuits |
| We develop, test and manufacture drug candidates that are generally intended for use in humans |
| Our drug discovery activities, including clinical trials we or our collaborators conduct, that result in the future manufacture and sale of drugs by us or our collaborators expose us to the risk of liability for personal injury or death to persons using these drugs |
| We may be required to pay substantial damages or incur legal costs in connection with defending any of these product liability claims, or we may not receive revenue from expected royalty or milestone payments if the commercialization of a drug is limited or ceases as a result of such claims |
| We have product liability insurance that contains customary exclusions and provides coverage up to dlra3dtta0 million per occurrence and in the aggregate, which we believe is customary in our industry for our current operations |
| However, our product liability insurance does not cover every type of product liability claim that we may face or loss we may incur, and may not adequately compensate us for the entire amount of covered claims or losses or for the harm to our business reputation |
| We may be unable to acquire or maintain additional or maintain our current insurance policies at acceptable costs or at all |
| If our use of chemical and hazardous materials violates applicable laws or regulations or causes personal injury we may be liable for damages |
| Our drug discovery activities, including the analysis and synthesis of chemical compounds, involve the controlled use of chemicals, including flammable, combustible, toxic and radioactive materials that are potentially hazardous |
| Our use, storage, handling and disposal of these materials is subject to federal, state and local laws and regulations, including the Resource Conservation and Recovery Act, the Occupational Safety and Health Act and local fire codes, and regulations promulgated by the Department of Transportation, the Drug Enforcement Agency, the Department of Energy, the Colorado Department of Public Health and Environment, and the Colorado Department of Human Services, Alcohol and Drug Abuse Division |
| We may incur significant costs to comply with these laws and regulations in the future |
| In addition, we cannot completely eliminate the risk of accidental contamination or injury from these materials, which could result in material unanticipated expenses, such as substantial fines or penalties, remediation costs or damages, or the loss of a permit or other authorization to operate or engage in our business |
| Those expenses could exceed our net worth and limit our ability to raise additional capital |
| Our operations could be interrupted by damage to our specialized laboratory facilities |
| Our operations are dependent upon the continued use of our highly specialized laboratories and equipment in Boulder and Longmont, Colorado |
| Catastrophic events, including fires or explosions, could damage our laboratories, equipment, scientific data, work in progress or inventories of chemical compounds and may materially interrupt our business |
| We employ safety precautions in our laboratory activities in order to reduce the likelihood of the occurrence of these catastrophic events; however, we cannot eliminate the chance that such an event will occur |
| The availability of laboratory space in these locations is limited, and rebuilding our facilities could be time consuming and result in substantial delays in fulfilling our agreements with our collaborators |
| We maintain business interruption insurance in the amount of dlra18dtta0 million to cover continuing expenses and lost revenue caused by such occurrences |
| However, this insurance does not compensate us for the loss of opportunity and potential harm to customer relations that our inability to meet our collaborators’ needs in a timely manner could create |
| 20 ______________________________________________________________________ RISKS RELATED TO OUR INDUSTRY The concentration of the pharmaceutical and biotechnology industry and any further consolidation could reduce the number of our potential collaborators |
| There are a limited number of pharmaceutical and biotechnology companies, and these companies represent a significant portion of the market for our capabilities |
| The number of our potential collaborators could decline even further through consolidation among these companies |
| If the number of our potential collaborators declines even further, they may be able to negotiate greater rights to the intellectual property they license from us, price discounts or other terms that are unfavorable to us |
| Capital market conditions may reduce our biotechnology collaborators’ ability to fund research |
| Traditionally, many unprofitable biotechnology companies have funded their research and development expenditures through raising capital in the equity markets |
| Declines and uncertainties in these markets have severely restricted raising new capital at times in the past and have affected these companies’ ability to continue to expand or fund existing research and development efforts |
| If our current or future biotechnology collaborators are unable to raise sufficient capital to fund research and development expenditures, we may not be able to expand or maintain current revenue |
| Health care reform and cost control initiatives by third-party payors could reduce the prices that can be charged for drugs, which could limit the commercial success of our drug candidates |
| The commercial success of our drug candidates will depend significantly on the availability of reimbursement to the patient from third party payors, such as governments and private insurance plans |
| In the United States, the Medicare Prescription Drug Improvement and Modernization Act of 2003 added a prescription drug benefit to Medicare beginning in 2006 and added a voluntary drug discount card program for Medicare beneficiaries otherwise without prescription drug coverage |
| However, future legislation may limit the prices that can be charged for drugs we develop and may limit our commercial opportunity and reduce any associated revenue and profits |
| For example, federal laws require drug manufacturers to pay specified rebates for medicines reimbursed by Medicaid and to provide discounts for out-patient medicines purchased by certain public health service entities and “disproportionate share” hospitals and for purchases by some federal governmental departments such as the Department of Veterans Affairs and the Department of Defense |
| In some countries other than the United States, reimbursement, pricing and profitability of prescription pharmaceuticals and biopharmaceuticals are subject to government control |
| Also, we expect managed care will continue to put pressure on the pricing of pharmaceutical and biopharmaceutical products |
| Cost control initiatives could decrease the price that we, or any potential collaborators receive for any of our future products, which could adversely affect our profitability |
| These initiatives may also have the effect of reducing the resources that pharmaceutical and biotechnology companies can devote to in-licensing drug candidates and the research and development of new drugs, which could reduce our resulting revenue |
| We or our collaborators may not obtain favorable reimbursement rates for our drug candidates |
| Third party payors, such as government and private insurance plans, frequently require companies to provide rebates and predetermined discounts from list prices and are increasingly challenging the prices charged for pharmaceuticals and other medical products |
| Our products may not be considered cost-effective, and reimbursement to the patient may not be available or be sufficient to allow the sale of our products on a competitive basis |
| We, or our collaborators may not be able to negotiate favorable reimbursement rates for our products |
| If we, or our collaborators fail to obtain an adequate level of reimbursement for our products by third-party payors, sales of the drugs would be adversely affected or there may be no commercially viable market for the products |
| The drug research and development industry has a history of patent and other intellectual property litigation, and we may be involved in costly intellectual property lawsuits |
| The drug research and development industry has a history of patent and other intellectual property litigation, and we believe these lawsuits are likely to continue |
| Legal proceedings relating to intellectual property would be expensive, take significant time and divert management’s attention from other business concerns |
| Because we produce drug candidates for a broad range of therapeutic areas and provide many different capabilities in this 21 ______________________________________________________________________ industry, we face potential patent infringement suits by companies that control patents for similar drug candidates or capabilities or other suits alleging infringement of their intellectual property rights |
| There could be issued patents of which we are not aware that our products infringe or patents that we believe we do not infringe that we are ultimately found to infringe |
| Moreover, patent applications are in many cases maintained in secrecy for eighteen months after filing or even until patents are issued |
| The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications were filed |
| Because patent applications can take many years to issue, there may be currently pending applications of which we are unaware that may later result in issued patents that we infringe with our products |
| In addition, technology created under our research and development collaborations may infringe the intellectual property rights of third parties, in which case we may not receive milestone or royalty revenue from those collaborations |
| If we do not prevail in an infringement lawsuit brought against us, we might have to pay substantial damages, including triple damages, and we could be required to stop the infringing activity or obtain a license to use the patented technology or redesign our products so as not to infringe the patent |
| We may not be able to enter into licensing arrangements at a reasonable cost or effectively redesign our products |
| Any inability to secure licenses or alternative technology could delay the introduction of our products or prevent us from manufacturing or selling products |
| The intellectual property rights we rely on to protect our proprietary drug candidates and the technology underlying our tools and techniques may be inadequate to prevent third parties from using our technology or developing competing capabilities or to protect our interests in our proprietary drug candidates |
| Our success will depend in part on our ability to protect patents and maintain the secrecy of proprietary processes and other technologies we develop for the testing and synthesis of chemical compounds in the drug discovery process |
| In addition, one of our business strategies is to develop our own proprietary drug candidates and enter into collaborations with pharmaceutical and biotechnology companies for the development of these drug candidates |
| In order to protect our rights to our proprietary drug candidates, we must obtain and maintain the intellectual property rights to such drug candidates |
| We currently have eight issued United States patents and numerous patent applications on file with the United States Patent and Trademark Office and around the world |
| Any patents that we may own or license now or in the future may not afford meaningful protection for our drug candidates or our technology and tools |
| In order to protect or enforce our intellectual property rights, we may have to initiate legal proceedings against third parties |
| Our efforts to enforce and maintain our intellectual property rights may not be successful and may result in substantial costs and diversion of management time |
| In addition, other companies may challenge our patents and, as a result, these patents could be narrowed, invalidated or rendered unenforceable, or we may be forced to stop using the technology covered by these patents or to license the technology from third parties |
| In addition, current and future patent applications on which we depend may not result in the issuance of patents in the United States or foreign countries |
| Even if our rights are valid, enforceable and broad in scope, competitors may develop drug candidates or other products based on similar research or technology that is not covered by our patents |
| Patent applications relating to or affecting our business may have been filed by a number of pharmaceutical and biopharmaceutical companies and academic institutions |
| A number of the technologies in these applications or patents may conflict with our technologies, patents or patent applications, which could reduce the scope of patent protection we could otherwise obtain |
| We could also become involved in interference proceedings in connection with one or more of our patents or patent applications to determine priority of inventions |
| We cannot be certain that we are the first creator of inventions covered by pending patent applications, or that we were the first to file patent applications for any such inventions |
| Drug candidates we develop that are approved for commercial marketing by the FDA would be subject to the provisions of the Drug Price Competition and Patent Term Restoration Act of 1984, known as the “Hatch-Waxman Act |
| ” The Hatch-Waxman Act provides companies with marketing exclusivity for varying time periods during which generic versions of a drug may not be marketed and allows companies to apply to extend patent protection for up to five additional years |
| It also provides a means for approving generic versions of a drug once the marketing exclusivity period has ended and all relevant patents have expired |
| The period of exclusive marketing, however, may be shortened if a patent is successfully challenged and defeated, which could reduce the amount of royalties we 22 ______________________________________________________________________ receive on the product |
| Agreements we have with our employees, consultants and collaborators may not afford adequate protection for our trade secrets, confidential information and other proprietary information |
| In addition to patent protection, we also rely on copyright and trademark protection, trade secrets, know-how, continuing technological innovation and licensing opportunities |
| In an effort to maintain the confidentiality and ownership of our trade secrets and proprietary information, we require our employees, consultants and advisors to execute confidentiality and proprietary information agreements |
| However, these agreements may not provide us with adequate protection against improper use or disclosure of confidential information and there may not be adequate remedies in the event of unauthorized use or disclosure |
| Furthermore, we may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities we conduct |
| In some situations, our confidentiality and proprietary information agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships |
| Although we require our employees and consultants to maintain the confidentiality of all proprietary information of their previous employers, these individuals, or we, may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations |
| Finally, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets |
| Our failure or inability to protect our proprietary information and techniques may inhibit or limit our ability to compete effectively, or exclude certain competitors from the market |
| The drug research and development industry is highly competitive, and we compete with some companies that offer a broader range of capabilities and have better access to resources than we do |
| The pharmaceutical and biotechnology industries are characterized by rapid and continuous technological innovation |
| We compete with companies worldwide that are engaged in the research and discovery, licensing, development and commercialization of drug candidates, including Arena Pharmaceuticals Inc |
| ; deCODE genetics, Inc |
| ; Exelixis Inc |
| ; Theravance, Inc |
| ; and Vertex Pharmaceuticals Incorporated |
| Some of our competitors have a broader range of capabilities and have greater access to financial, technical, scientific, regulatory, business development, recruiting and other resources than we do |
| Their access to greater resources may allow them to develop processes or products that are more effective, safer or less costly, or gain greater market acceptance, than products we develop or for which they obtain FDA approval more rapidly than we do |
| We anticipate that we will face increased competition in the future as new companies enter the market and advanced technologies become available |
| We face potential liability related to the privacy of health information we obtain from research institutions |
| Most health care providers, including research institutions from whom we or our collaborators obtain patient information, are subject to privacy regulations promulgated under the Health Insurance Portability and Accountability Act of 1996, or HIPAA Although we are not directly regulated by HIPAA, we could face substantial criminal penalties if we knowingly receive individually identifiable health information from a health care provider or research institution that has not satisfied HIPPA’s disclosure standards |
| In addition, certain state privacy laws and genetic testing laws may apply directly to our operations and/or those of our collaborators and may impose restrictions on our use and dissemination of individuals’ health information |
| Moreover, patients about whom we or our collaborators obtain information, as well as the providers who share this information with us, may have contractual rights that limit our ability to use and disclose the information |
| Claims that we have violated individuals’ privacy rights or breached our contractual obligations, even if we are not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business |
| 23 ______________________________________________________________________ RISKS RELATED TO OUR STOCK Our officers and directors have significant control over us and their interests may differ from those of our stockholders |
| At June 30, 2006, our directors and officers beneficially owned or controlled approximately 13prca of our common stock |
| Individually and in the aggregate, these stockholders significantly influence our management, affairs and all matters requiring stockholder approval |
| These stockholders may vote their shares in a way with which other stockholders do not agree |
| In particular, this concentration of ownership may have the effect of delaying, deferring or preventing an acquisition of us or entrenching management and may adversely affect the market price of our common stock |
| Our quarterly operating results could fluctuate significantly, which could cause our stock price to decline |
| Entering into licensing or drug discovery collaborations typically involves significant technical evaluation and/or commitment of capital by our collaborators |
| Accordingly, negotiation can be lengthy and is subject to a number of significant risks, including collaborators’ budgetary constraints and internal acceptance reviews |
| In addition, a significant portion of our revenue is attributable to up-front payments and milestones that are non-recurring |
| Further, some of our collaborators can influence when we deliver products and perform services, and therefore receive revenue, under their contracts with us |
| Due to these factors, our operating results could fluctuate significantly from quarter to quarter |
| In addition, we may experience significant fluctuations in quarterly operating results due to factors such as general and industry-specific economic conditions that may affect the research and development expenditures of pharmaceutical and biotechnology companies |
| Due to the possibility of fluctuations in our revenue and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance |
| Our operating results in some quarters may not meet the expectations of stock market analysts and investors |
| If we do not meet analysts’ and/or investors’ expectations, our stock price could decline |
| Because our stock price may be volatile, our stock price could experience substantial declines |
| The market price of our common stock has historically experienced and may continue to experience volatility |
| The high and low closing bids for our common stock were dlra9dtta67 and dlra5dtta99 respectively in fiscal 2006, and dlra9dtta73 and dlra5dtta66 respectively in fiscal 2005 |
| Our quarterly operating results, the success or failure of our internal drug discovery efforts, changes in general conditions in the economy or the financial markets and other developments affecting our collaborators, our competitors or us could cause the market price of our common stock to fluctuate substantially |
| This volatility coupled with market declines in our industry over the past several years have affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and may adversely affect the price of our common stock |
| In the past, securities class action litigation has often been instituted following periods of volatility in the market price of a company’s securities |
| A securities class action suit against us could result in potential liabilities, substantial costs and the diversion of management’s attention and resources, regardless of whether we win or lose |
| Because we do not intend to pay dividends, stockholders will benefit from an investment in our common stock only if it appreciates in value |
| We have never declared or paid any cash dividends on our common stock and are restricted in our ability to do so under our current credit agreement |
| We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future |
| As a result, the success of an investment in our common stock will depend entirely upon any future appreciation |
| There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares |
| 24 ______________________________________________________________________ The ability of our stockholders to control our policies and effect a change of control of our company is limited, which may not be in the best interests of our stockholders |
| There are provisions in our certificate of incorporation and bylaws that may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests |
| These include the following provisions in our certificate of incorporation: · Our certificate of incorporation provides for three classes of directors with the term of office of one class expiring each year, commonly referred to as a “staggered board |
| ” By preventing stockholders from voting on the election of more than one class of directors at any annual meeting of stockholders, this provision may have the effect of keeping the current members of our board of directors in control for a longer period of time than stockholders may desire |
| · Our certificate of incorporation authorizes our board of directors to issue shares of preferred stock without stockholder approval and to establish the preferences and rights of any preferred stock issued, which would allow the board to issue one or more classes or series of preferred stock that could discourage or delay a tender offer or change in control |
| In addition, our board of directors approved a Rights Agreement on August 2, 2001, which could prevent or deter a potential unsolicited takeover of us by causing substantial dilution of an acquirer of 15prca or more of our outstanding common stock |
| We are also subject to the business combination provisions of Section 203 of the Delaware General Corporation Law, which, in general, imposes restrictions upon acquirers of 15prca or more of our stock |
| As a result, it is difficult for a third party to acquire control of us without the approval of the board of directors and, therefore, mergers and acquisitions of us that our stockholders may consider in their best interests may not occur |